Gary V. Powell, Author

My Republican friends are always telling me that the private sector operates more efficiently than the public sector. They want to privatize everything from Medicare and Social Security to garbage collection. I always tell them that corporate efficiency is a Conservatve myth. Anyone who's worked in Corporate America knows that it's rife with stupidity and inefficiency, that it's largely unaccountable to its shareholders, who vote mostly by proxy, and that if a company is big enough and "venerable" enough the Federal Government AKA The American Taxpayer will bail it's sorry ass out. So much for the "invisible hand."

Witness Bear Stearns.

Bears Stearns was an investment bank. That means it underwrote (provided a primary market for) securities that were later distributed to the secondary market. Much of what it underwrote in the last few years are what are now being called "sub-prime" mortgages. The story Bear Stearns and the Fed wants to tell is that the company's troubles are due to a few dead beats who couldn't make mortgage payments, due to rising interest rates and the poor judgement of the borrower. Bear Stearns and the Fed would like you to believe that they have no culpability in this mess.

That's a lie.

Here's how this really worked.

Commercial banks and other mortgage lenders lowered underwriting standards and underwrote bad loans based on the unreasonable expectation of housing prices continuing to rise at unprecedented rates. The borrowers weren't deadbeats. They weren't a few. They were millions of middle-class borrowers seeking to obtain the American Dream of a private home of their own. They were encouraged by mortgage lenders and realtors to "overbuy." In some cases they were outright lied to about the terms of the mortgage. If they had bought what they could have afforded, no one would have considered them "sub-prime." They were "sub-prime" because they bought more than they could reasonably afford, egged on by realtors and mortgage lenders.

The realtors, banks, and other mortgage lenders made a lot of money on these loans and home sales. The lenders made more money when they got the investment banks like Bear Stearns to buy up their "sub-prime" mortgage paper, securitize it, and issue bonds in the secondary market. Then the investment banks (like Bear Stearns) made a ton of money on underwriting fees and profits when they resold the securities they underwrote in the secondary market. The investment banks (like Bear Stearns) paid exorbitant bonuses to their employees (Harvard and Yale MBAs everyone) who put these crazy deals together.

Then when interest rates went up and housing prices went down, when people who had been seduced (at a profit to their seducers) into buying houses beyond their means could no longer make their mortgage payments and defaults surged, Bear Stearns faltered. They had failed to mark up the bonds backed by the "sub-prime" mortgages sufficiently, and as those bonds dropped in value (as they should have, based on their low quality), Bear Stearns had increasing difficulty obtaining liquidity from other institutional players to maintain the necessary liqudity to pay employees, interest, and outstanding obligations.

Consequently, the value of Bear Stearns stock plummeted and it was forced into a "fire sale" to JP Morgan-Chase with the Fed by their side.

Bear Stearns isn't exactly without culpability here. Nor is the Fed (or Congress and the Bush Administration), which did little to reign in the mortgage crisis in the making.

I hope the lenders, the realtors, and investment bankers who made a ton of money on the way up, have put it away for a rainy day.

Meanwhile, nothing associated with this bail-out saves one home or family.

We have two foreclosures in my neighborhood.

Stay tuned for more on how the bail-out worked and how you're paying for it.

By the way, the guy in the pic is Herbert Hoover, the President who oversaw the onset of the Great Depression.